How to tough out a slump

In a recession, should law firms axe staff or simply try to improve efficiency? Scott Neilson discovers that as a slump bites, management faces hard choices about redundancies and partnership culls

No two recessions, the experts all agree, are exactly the same.

So, what should law firm partners do to recession-proof their businesses this time around?

A firm's main costs are salaries, premises, technology and indemnity insurance.

But when it comes to tightening the belt, these costs offer the law firm manager little scope.

Rents are unlikely to fall in the foreseeable future and indemnity insurance premiums are for the most part on the rise.

Meanwhile, marketing and IT remain crucial to improving a firm's performance in a slowdown or slump, although marketing in particular is one area where the axe often falls.

So, what other tactics can firms adopt to deal with a downturn? One obvious - and traditional - reaction to a fall-off in work is to build up a firm's counter-cyclical departments such as litigation, insolvency and employment.

But the lessons of the recession in the 1990s, when many firms took a hammering after being caught without insolvency practices, may have been learned a little too well by London lawyers, says Roger Zair, head of professional practices at accountancy firm Grant Thornton.

'Of course, you can re-deploy people internally, so that corporate people start popping up in employment teams.

But obviously, while this works to a certain extent, you can't go too far with it because people are specialists,' Mr Zair says.

'That's the nature of commercial law.'

Peter Scott, former managing partner of Eversheds' London office and now a director of Horwath Consulting, says that a far better course of action is to aim for increased productivity and efficiency.

Mr Scott says many firms could improve their financial performance if they focused on those aspects of financial management that really will make a difference to a firm's bottom line and to cash flow.

'Fourteen days after a month ends, a managing partner should send out a note to every partner asking for written confirmation that every bill processed up to month-end has been delivered to the clients.

Partners are then going to have to think very carefully whether they sign that or not.

Because if they do send it back and they haven't delivered the bill, then they could be for the high jump,' Mr Scott says.

'Furthermore, the older a debt is the more difficult it becomes to recover.

Basically, firms need to set up systems where credit control runs like clockwork and the day-to- day dross is taken out of the hands of the partners.'

Firms need to work smarter rather than harder, he says.

'If you push the boat out a little on pricing, recording of time and recovery of time, then you're going to make more money, even in a downturn.

I have known firms where the effect of [not considering] those three factors has combined to halve profits.

'All partners need to financially manage their work and their clients.

It is their responsibility to keep their lock-up [work in progress plus debts] as low as possible.

Cash management is king and law firms fail because of a lack of it.'

Yet the consultant freely admits that improving financial efficiency is far from the only effective way of dealing with a downturn.

Cutting staff - fee-earners and non fee-earners - is a traditional measure that remains as effective now as it has always been, he says.

Salaries of both legal and support staff account for around two-thirds of the average firm's overheads and there has been no shortage of reports recently that various firms have made staff redundant.

'It's time to take a "zero-budget" approach to law firm management,' Mr Scott insists.

'Put crudely, the continued existence of everyone and everything should be questioned.'

However, assistants may not have to worry too much, Mr Scott says.

Firms are not, on the whole, looking to wield the axe among the ranks; it is partner performance, or under-performance, that will need to be targeted this time, he argues.

'Many firms avoided addressing partner under-performance because it is the most sensitive issue for a firm.

But almost every firm we speak to admits to having under-performing partners.'

For Mr Scott, the criteria partners must meet are simple: 'One way firms can begin to instil these higher performance norms and to sort out those partners who are just cruising is to ask the question, "how much do you really want to earn?"'

This easing-out process is increasingly targeting younger partners in the Square Mile, says Stephen Ralph, a litigation partner with City firm Dawson & Co who specialises in partnership disputes.

'It's spoken of as massaging the firm, under-performance, relocating and other things.

But the instances I am seeing involve partners who are younger and younger,' Mr Ralph says.

'The message is that an equity partnership is no longer for life.'

Firms that reduce their partner count usually do so either because of restructuring or under-performance.

For northern powerhouse Addleshaw Booth & Co, it was a case of restructuring when it cut 11 partners in April.

Like many other firms which have made similar decisions, it was making plenty of money at the time.

Addleshaw's management team had spent three months crunching the numbers on the firm's 2002-2005 business plan.

It weighed profits, fees, and leverage ratios.

It evaluated the candidate pipeline to consider who was partner material.

The results were definitive, says managing partner Mark Jones, who was then forced by circumstance to begin one of the hardest jobs of his life.

In this case, however, it was not a matter of under-performance, but over-staffing.

The firm cited 'a greater capacity at partner level than fitted in with our anticipated growth plan' as the cause of the decision, with Mr Jones making it clear at the time that those leaving understood it was a 'capacity not a capability issue' (see [2002] Gazette, 30 May, 28).

'Some of the 11 people that [senior partner] Paul Lee and I had to talk to, we have known for 25 years.

[But] at least it was straight, honest, between the eyes.

At least there was no messing about.

That was what we thought of as the fairest way to deal with the individuals,' Mr Jones says.

'One piece of advice I'd give to any management team in the situation we were in is "do it, don't duck it".'

Removing partners can be long and difficult process, he says.

Mr Scott adds that the most important thing is to handle such matters with humanity: 'That is crucial.

That can be the difference between the person going and cutting up rough and causing a real problem.'

Good management and guidance will prove their worth in a downturn, according to Grant Thornton's Mr Zair, who says many of the City's law firm partners have no experience of the tough times and are a 'sheltered generation' of lawyers.

'A good management team will have worked with the younger partners to explain that from time to time chill winds blow and they shouldn't expect the figures to go up every year,' he says.

'The key thing is to let the individual leave with dignity.

Stakeholders must believe what has to be done has to be done.'

Some firms arrange for career counsellors and psychologists.

Addleshaws instituted a buddy system, pulling aside co-workers early on and asking them to counsel their friends through the difficult period.

'There were a number of occasions when my job was to really be sounded off at - just to listen,' Mr Jones says.

He adds that none of the 11, eight of whom have already left Addleshaws, wanted their fate put to a partnership vote.

'I'm quite sure that once they understood what and who had been involved in the process, part of their reasons for deciding not to would have been that they didn't think there would be any change in the outcome,' he says.

But as important as any staff that leave are those who remain.

Nothing creates uncertainty and damages morale effectively as a poorly handled round of redundancies or a badly managed partnership cull.

This can cost a firm staff it wants to keep.

Involving staff in any decisions can make the pain easier to bear, says Mr Jones.

'One of the first casualties in hard times tends to be transparency.

Management meets behind closed doors and its decisions become a mystery to the staff.

This kind of uncertainty means that even the more optimistic staff at a firm will remain unsettled.'

Scott Neilson is a freelance journalist